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Active Investing

Active investing is where the investor is more involved with the security/stock picking and when
to buy and sell. This style of investing requires substantially more ongoing research and
discipline (emotional and logical). Although you can simply pick a mutual fund to do the active
investing for you, not all active mutual fund will perform well. In fact, as mentioned before,
most active mutual funds will not even beat the index (after fees).
There are many types of active investing styles. The ones listed below do not account for
trading strategies, but more along the lines of longer term buy and hold.page 185

DEFINITION of 'Active Investing'


An investment strategy involving ongoing buying and selling actions by the investor. Active
investors purchase investments and continuously monitor their activity in order to exploit
profitable conditions.

INVESTOPEDIA EXPLAINS 'Active Investing'


Active investing is highly involved. Unlike passive investors, who invest in a stock when they
believe in its potential for long-term appreciation, active investors will typically look at the price
movements of their stocks many times a day. Typically, active investors are seeking short-term
profits.

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Active management (also called active investing) refers to a portfolio
management strategy where the manager makes specific investments with the
goal of outperforming an investment benchmark index.

A Comparison of Active and Passive Investment Strategies


This article was originally written in 1995. Various research up through 2011
has been included in numerous updates. The story remains the same. A
huge, well-replicated and expanding volume of studies have clearly proven
the advantage of passive over active investment management.
WHAT IS ACTIVE MANAGEMENT?

Active management might best be described as an attempt to apply human


intelligence to find "good deals" in the financial markets. Active management
is the predominant model for investment strategy today. Active managers try
to pick attractive stocks, bonds, mutual funds, time when to move into or out
of markets or market sectors, and place leveraged bets on the future
direction of securities and markets with options, futures, and other
derivatives. Their objective is to make a profit, and, often without intention,
to do better than they would have done if they simply accepted average
market returns. In pursuing their objectives, active managers search out
information they believe to be valuable, and often develop complex or
proprietary selection and trading systems. Active management encompasses
hundreds of methods, and includes fundamental analysis, technical analysis,
and macroeconomic analysis, all having in common an attempt to determine
profitable future investment trends.
WHAT IS PASSIVE MANAGEMENT?

Passive investment management makes no attempt to distinguish attractive


from unattractive securities, or forecast securities prices, or time markets
and market sectors. Passive managers invest in broad sectors of the market,
called asset classes or indexes, and, like active investors, want to make a
profit, but accept the average returns various asset classes produce. Passive
investors make little or no use of the information active investors seek out.
Instead, they allocate assets based upon long-term historical data
delineating probable asset class risks and returns, diversify widely within and
across asset classes, and maintain allocations long-term through periodic
rebalancing of asset classes.

What is active management?


Actively managed investment funds are run by a professional fund managers or investment
research teams who make all the investment decisions, like which companies to invest in or
when to buy and sell different assets, on your behalf. They have extensive access to research in
different markets, sectors and often meet with companies to analyse and assess their prospects
before making a decision to invest.
The aim with active management is to deliver a return that is superior to the market as a whole
or, for funds with more conservative investment strategies, to protect capital and lose less value
if markets fall. An actively managed fund can offer you the potential for much higher returns
than a market provides if your fund manager makes the right calls.

Lock In
To close a position such that the profit or loss from an investment is realized. For
example, if an investor buys a stock at $5 per share and the price goes to $10, the
investor has a paper profit of $5 per share. However, if the investor waits to sell the
stock until the price drops to $8, the locked in profit is only $3 per share. Investors
often wait before locking in substantial profits or losses, as locking in a profit may
result in higher taxation, while locking in a loss removes the possibility that the
investment can be recovered.
Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved
Lock in may be used in foreign exchange transaction, such as forward contracts, futures contracts,
currency swaps, and currency options contracts.

Lock-in
A specified time period that an investor is locked into an investment. An example
would be a period following a flotation when major shareholders agree not to sell
their holdings. The objective is to give investors confidence that the management
and key shareholders do not intend to cash in their stock the moment the market
opens. Most flotation prospectuses have get-out clauses, the most common being
that if the company is the subject of a takeover bid, shareholders are allowed to
sell.
.

1.Period during which a loan cannot be paid-off earlier than scheduled without incurring
penalties. Its objective is to generate a certain minimum return on the sums advanced that covers
the lender's lending and loan administration expenses.
2.Period for which a lender agrees to hold steady the agreed upon interest rate on the loan
irrespective of the market rate. Also called lockup period.
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Tobin's q
From Wikipedia, the free encyclopedia

Tobin's q[1] is the ratio between a physical asset's market value and its replacement value. It was
introduced in 1968 by James Tobin and William Brainard,[1] although the use of the letter "q" did
not appear until Tobin's 1969 article "A general equilibrium approach to monetary theory".[2][3]
Tobin (1969) writes
One, the numerator, is the market valuation: the going price in the market for exchanging
existing assets. The other, the denominator, is the replacement or reproduction cost: the price in

the market for the newly produced commodities. We believe that this ratio has considerable
macroeconomic significance and usefulness, as the nexus between financial markets and markets
for goods and services.[4]
We measure firms groTobins Q(called Q)followingMcConnell and Servaes (1990):
Tobins Q = (Market Value of Equity + Book Value of Debt ) / Book Value of Assets
We use Tobins q, measured as the ratio of the market value of the firms assets to their book value, as our
measure of growth opportunities.

DEFINITION of 'Q Ratio (Tobin's Q Ratio)'


A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who
hypothesized that the combined market value of all the companies on the stock market should be
about equal to their replacement costs. The Q ratio is calculated as the market value of a
company divided by the replacement value of the firm's assets:

INVESTOPEDIA EXPLAINS 'Q Ratio (Tobin's Q Ratio)'


For example, a low Q (between 0 and 1) means that the cost to replace a firm's assets is greater
than the value of its stock. This implies that the stock is undervalued. Conversely, a high Q
(greater than 1) implies that a firm's stock is more expensive than the replacement cost of its
assets, which implies that the stock is overvalued. This measure of stock valuation is the driving
factor behind investment decisions in Tobin's model.

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Positive Carry
Positive carry
Related: Net financing cost
Copyright 2012, Campbell R. Harvey. All Rights Reserved.

Positive Carry
A situation in which an investor has two opposite positions and in which the cash
inflow from one position exceeds the cash outflow of the other. For example, if one

borrows money, owes 10% interest, and then promptly lends the same amount of
money at 12% interest, then the borrower/lender has a positive carry.
Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

positive carry
The current net income from an investment
position when the current income from the
investment exceeds its cost of carry. A Treasury
bond with a current yield of 14% has a positive
carry if its purchase can be financed at 12%.
Compare negative carry. See also carrying charges.
DEFINITION of 'Positive Carry'
A strategy of holding two offsetting positions, one of which creates an incoming cashflow that is
greater than the obligations of the other.

INVESTOPEDIA EXPLAINS 'Positive Carry'


Similar to arbitrage, positive carries generally occur in the currency market where interest paid to
investors in one currency is more than they have to pay to borrow in another currency.
Another example of a positive carry would be borrowing $1000 from the bank at 5% and
investing it into a bond paying 6%. Thus, the coupon on the bond would pay more than the
interest owing on the loan to the bank, and you pocket the 1% difference.

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positive carry - Investment & Finance Definition

When the cost of borrowing money to pay for a securities purchase is less than the yield on the
securities. For instance, if funds are borrowed at a cost of 6 percent, and the stock or bond
investment yields 8 percent, there is a positive carry. The inverse is a negative carry.
ex dividend (exclusive of dividends).

Ex-Dividend
Also found in: Dictionary/thesaurus, Legal, Acronyms, Wikipedia.

Ex-dividend
This literally means "without <dividend< a="">." The buyer of </dividend<>shares
when they are quoted ex-dividend is not entitled to receive a declared <dividend<
a="">. It is the interval between the </dividend<> record date and the payment
date during which the stock trades without its dividend-the buyer of a stock selling
ex-dividend does not receive the recently declared dividend. Antithesis of cum
dividend (with dividend).
Copyright 2012, Campbell R. Harvey. All Rights Reserved.

Ex-Dividend
The sale of a security after a dividend has been announced but before it has been
distributed. When a security is sold ex-dividend, the dividend remains with the
seller. Selling ex-dividend almost invariably reduces the price for which the security
is sold by the amount of the dividend. See also: Cum dividend, Ex-dividend date.
Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

ex-dividend
Used to refer to a stock no longer carrying the right to the next dividend payment
because the settlement date occurs after the record date. If, for example, GenCorp
common stock goes ex-dividend on May 31, an investor purchasing the stock on or
after that date will not receive the next dividend check. A stock trading ex-dividend
is indicated in stock transaction tables by the symbol x in the volume column.
Compare cum dividend.
Case Study A stock's ex-dividend date should be of more interest to an investor
than the dividend record date or dividend payment date. A stock must be purchased
one day prior to the ex-dividend date for the buyer to claim a dividend that has
been announced but not yet paid. Buy shares of stock on the ex-dividend date and
the seller, not you, will receive the upcoming dividend. The ex-dividend date is two
business days prior to the record date because three days are required for regular
settlement of a stock transaction. Buy stock on Tuesday and you will be listed as the

owner of record on Friday, the day that payment is required for the purchase. If a
firm's directors have declared that a dividend will be paid to stockholders of record
on Friday, you must buy the stock the stock on Tuesday in order to have a right to
the dividend. In this case the ex-dividend date is Wednesday, two days prior to the
record date. Relevant dates for the stock of international petroleum giant BP are
illustrated below.
Quarter 1

Quarter 2

Quarter 3

Quarter 4

Announcement date

Feb 13

May 8

August 7

Nov 6

Ex-dividend date

Feb 21

May 16

August 15

Nov 14

Record date

Feb 23

May 18

August 17

Nov 16

Payment date

March 19

June 11

Sept 10

Dec 10

Notice that the record date follows the ex-dividend date by two business days for
each quarterly dividend. In the first quarter you must have purchased the stock by
February 20 to be listed as a stockholder on February 23 and receive the dividend
on March 19. Purchasing the stock on February 21 meant you would not have been
listed as a stockholder of record until February 24, one day beyond when the
company determined who was to receive the dividend. A weekend or holiday
between the ex-dividend and record dates lengthens the time difference to four
days or three days, respectively. The schedule for BP indicates owners of the stock
on the day prior to the ex-dividend date must wait nearly a month for actual
payment of the dividend.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by
David L. Scott. Copyright 2003 by Houghton Mifflin Company. Published by
Houghton Mifflin Company. All rights reserved.

Ex-dividend.
You must own a security by the record date the company sets to be entitled to the dividend it will
pay on the payable date.
The period between those dates -- anywhere from a week to a month or more -- during which
new investors in the security are not entitled to that dividend is called the ex-dividend period.
On the day the ex-dividend period begins, which is the first trade date that will settle after the
record date, the stock is said to go ex-dividend.

Generally, the price of a stock rises in relation to the amount of the anticipated dividend as the
ex-dividend date approaches. It drops back on the first day of the ex-dividend period to reflect
the amount that is being paid out as dividend.
Dictionary of Financial Terms. Copyright 2008 Lightbulb Press, Inc. All Rights
Reserved.

Ex-Dividend
What Does Ex-Dividend Mean?
A classification assigned to stock when a declared dividend belongs to the seller rather than the
buyer at the time of a trade. A stock is given ex-dividend status if a person has been confirmed by
the company to receive the dividend payment.
Investopedia explains Ex-Dividend
A stock trades ex-dividend on or after the ex-dividend date (exdate). At this point, the person
who owns the security on the ex-dividend date will be awarded the payment regardless of who
currently holds the stock. After the ex-date has been declared, the stock usually drops in price by
the amount of the expected dividend; the stock is trading without the dividend.

DEFINITION of 'Ex-Dividend'
A classification of trading shares when a declared dividend belongs to the seller
rather than the buyer. A stock will be given ex-dividend status if a person has been
confirmed by the company to receive the dividend payment.

INVESTOPEDIA EXPLAINS 'Ex-Dividend'


A stock trades ex-dividend on or after the ex-dividend date (ex-date). At this point,
the person who owns the security on the ex-dividend date will be awarded the
payment, regardless of who currently holds the stock. After the ex-date has been
declared, the stock will usually drop in price by the amount of the expected
dividend.
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When a share has gone ex-dividend it means that this payment has already been credited to
the holder of the shares. If the shareholder then selects to sell these shares the buyer would
not be eligible to receive this payment and would have to wait until the next dividend
payment.

As an investor a decision needs to be made on if shares should be purchased within the


dividend period or after the share has gone ex-dividend, both have pros and cons as
follows:
Generally, a stocks price will drop the day the ex-dividend period starts, this allows the
potential buyer of the shares to purchase at a lower price which is an incentive as they will
not receive the benefit of the dividend payment until the next dividend date. However, if the
investor decides they want to buy the shares prior to them becoming ex-dividend they will
normally be paying a premium but they will also benefit from the dividend payment.

Why it Matters:
In a nutshell, if you buy a stock before the ex-dividend date, then you will receive the next
upcoming dividend payment. If you purchase the stock on or after the ex-dividend date, you will
not receive the dividend.
With a large dividend, the price of a stock may move up by the dollar amount of the dividend as
the ex-dividend date approaches and then fall by that amount after the ex-dividend date. A stock
that has gone ex-dividend is marked with an "x" in newspapers on that day.

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